#9 🔊 Austyn’s Weekly Financial Strategy.
Below is a link to a short Q&A audio interview I’ve just recorded where I give my thoughts on the continuing unprecedented events.
So it’s Nick Griffith here interviewing Austyn Smith. Thanks very much for everyone listening and thanks for your questions, do keep them coming in. And today, I think there’s a series of questions, … what’s on your mind, what lessons have you’ve learnt from the past, and how are these helping you now ? Also what are you learning that’s new in the current climate?
I’ll start off with the current climate, because I’m always learning things, and I think that’s important. Just to kick-off, the Bank of England announced today some quite gloomy things, which are possibly quite realistic about our economy, but I think no one really knows and there are just so many unknowns at the moment. So I think, we have to stay relatively positive. The lessons that I’m learning at the moment are that there seems to be a big difference between winners and losers in the current environment.
Just to give you an example of that, Microsoft said in the last week that they were hardly affected by the virus, whereas as we know, British Airways and Virgin Atlantic are having all sorts of problems. So this says to me that this is probably likely to continue. We don’t know precisely who the winners and losers are going to be, but we’ve got an idea to start off with, and that very much we have to have ‘eyes on’. It’s very much a continuous review of client portfolios.
The second thing is that obviously cash flow to any business is important and clarity on reporting, but that just seems to be a little bit clouded at the moment, because some companies have been told that they don’t have to release figures. But what we do know is that there’s increased borrowing and many companies have borrowed to stay afloat. The issue being, if in the next three to six months the recovery is slower, then those companies that were in trouble, even though they’ve borrowed lots of money to continue, could still have problems. Perhaps the consumer is a little bit cautious in going away on holiday or going back to restaurants or whatever it may be. So I think we have to be a little bit careful about that and a little bit vigilant.
Then the third thing really is visibility on profits, or future profits, and there are a lot of unknowns there. So I think in conclusion on that, Nick, we’re looking at possible scenarios. One of the things we’ve already talked about is, is this one problem, one solution and then we’re over it? Or is it more of a W shaped recovery? I think what it all comes down to is consideration, for better risk management.
Indeed. And I think we saw one of the biggest investors in the world, Warren Buffett, recently selling his shares in airline stocks. So he’s obviously got his strategy for the here and now. But what do you mean for yourself and your clients, by a better risk management strategy?
Yes, it’s very interesting. Warren Buffett, 90 years old, one of the most famous investors in America, he is one of those people that keeps things, never sells them, he buys into stock and just holds it for the long term. He’s not someone who would cut and run from certain sectors, but he’s done that with airlines. And I think this just shows the changing landscape and what I mentioned earlier, that in the next few years, there are going to be massive differences between winners and losers and you don’t really want to be on the wrong side of that. So being very vigilant and also being prepared to hold back a little bit, and being prepared to have some money in cash is important. Cash doesn’t give a return, but it does help protect the downside., and it also gives you optionality on buying into things that have become cheaper.
So Warren Buffett famously looks at cash as not so much how much it can earn, but as and when you need it, you can buy other assets more cheaply. I would follow his views that the purpose of an investment portfolio is to diversify risk and serve as a place to protect wealth that you’ve amassed, rather than speculating and trying to beat the market. So really it’s very much part of our core DNA that we are cautious. And so yes, we have been holding a bit of cash recently.
And I think you’ve mentioned the idea of a drip feed strategy and approach. Could you just explain, in simple terms, really what that means?
Yes. A drip feed strategy can apply in different scenarios. But briefly, if an existing client of ours has been relatively cautious and most of our clients are, what we call Safe Harbour Planning ® because you have been cautious, firstly, you haven’t really been affected very much by events in the last few months. And secondly, that then gives you optionality to drip feed into the market to take up opportunities as they arise. It’s not an all-in strategy, it’s something that happens over time. And so when you start a drip feed strategy, what you’re really looking at, is the picture every month or every couple of months, taking a view as to how much you will drip feed into the market. And of course you could pass on certain months if that’s what you wanted to do. So it means a lot more work for us. But actually, it’s better for the client because we are going through this very uncertain period.
So Safe Harbour Planning ®, is a drip feed strategy that came about from our experiences in 2008. That really helped our clients back then to protect their downside, and then slowly reintroduce a bit of capital into portfolios on a gradual basis, to benefit from the upward trend. So it almost gives you the best of both worlds in that it helps protect the downside and preserve confidence, but also over the long run, as things get better, it gives you an uplift as well.
I remember, I was with a client a few years ago and we went to London to do what’s called a ‘beauty parade’, where in a space of a day, we saw four of the most famous fund managers.
The client wanted to invest a large lump sum, the thing that struck me most was that their philosophy, if you can call it that, was just ‘chuck it all in the market’. And I thought I couldn’t believe it and nor could the client believe it, in that they didn’t really have a phasing in strategy or a drip feed strategy. It was very much a binary decision. You either put it all in or you don’t do it. And the thing that really hit home there was that it’s a 50/50 toss of a coin whether it works or not. And really, it didn’t align very well with the client and it didn’t sit comfortably with me. And I thought, well there must be a better way of doing this because, to give an analogy, if you inherited some money in December last year and stuck it all in the market, you would obviously be sitting on a large loss now.
So I think there are different strategies for different environments and certainly, the drip feed strategy has always served our clients incredibly well in helping protect what they’ve got, whilst introducing them, hopefully, to a positive scenario in the coming months and years, as markets get better.
I think the Prime Minister is going to be following a drip feed strategy for releasing lockdown ! It’s not an ‘all in’ approach. So I think that’s a universal strategy, we don’t know what we don’t know.
Yes, I think one of the things that has always set us apart, and it’s part of my DNA and so the company’s DNA, is that we always prepare in advance for bad scenarios. And the thing is, we know that bad scenarios happen, we just don’t know when. So we always are a little bit cautious in our approach. And of course, when these things do happen, it actually gives us an opportunity to move clients forward because we’ve actually protected them on the downside.
Whilst I’m on that subject, what I would say is that it’s crucial if someone is in the run up to retirement and the first few years after retirement to really manage risk. I think in other scenarios with other people I’ve come across that we haven’t advised, maybe they’ve stuck everything in the market at the wrong time and it’s backfired. So it’s really crucial to press the pause button in the years approaching retirement and just after, just to make sure that you set yourself up for a good retirement.
Indeed. You want to invest cautiously, rather than speculate, particularly when people are at that point in their lives.
Yes, for example at the moment, we’re seeing markets that are speculating that it’s going to be a V-shaped recovery and that everything’s going to be okay. I think it’s looking slightly unlikely that that’s the case. My feeling is that we should try and build your lifeboat in advance to ride out the storms with greater comfort, and that way, you’re not too badly affected.
Indeed, I think we don’t know how long the journey is.
Yes, it’s all about managing the journey and being adaptable, possibly doing a bit of a drip feed here and there, and where we can, trying to be cautious.
Indeed. Well, thank you very much, Austyn. If anyone’s got questions, particularly as events are developing quickly, then email them across, and we can go through them on one of our future calls. So thanks very much.
Thank you very much, Nick.
Past performance is not a guide to future performance
The value of investments can fall as well as rise
Portfolio performance varies according to client circumstances
Austyn Smith is a leading advocate of the ‘risk managed’ approach and ‘all weather’ investing, and has been featured as a Citywire ‘Cover Star’ in 2010, 2013 and 2017.
Following his work on risk reduction strategies, in 2011 he was recognized by Citywire Wealth Manager magazine as ‘Being in a position of some influence among your peer group, and likely to take a leading role in setting the investment agenda for UK Private Client managers.’
Austyn has recently contributed to leading publications by Citywire, and the Institute of Directors, and over the years has been quoted in the Sunday Times, Mail on Sunday, The Independent, and Bloomberg Markets.
With over 25 years wealth management experience, Austyn lives with his wife and children, Black Labrador and Springer, in Beaconsfield, Bucks.